Marketmind: Interminable anxiety
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[February 15, 2023] A
look at the day ahead in U.S. and global markets from Mike Dolan.
U.S. inflation is not falling fast enough, the Federal Reserve is
stamping its foot and the assumed 'terminal' interest rate in this
brutal monetary policy tightening cycle is climbing upwards once again.
The net impact of Tuesday's sticky U.S. inflation report for January and
the red hot employment readout for the same month has been to catapult
market pricing of both peak Fed rates and where they'll be at year-end
well above 5% and above where even Fed guidance had been late last year.
Deutsche Bank, for one, has raised its U.S. terminal rate forecast by
half a percentage point to 5.6% since the CPI release, with some market
players already mulling the chance that even 6% now comes on the risk
radar.
And as one of the leading doves on the Fed's policymaking council - Vice
Chair Lael Brainard - is set to depart the central bank later this
month, her colleagues seem happy for markets to look ever higher for the
rates summit.
"Clearly there are risks that inflation stays higher for longer than
expected, or that we might need to raise rates higher" than current
forecasts, said New York Fed President John Williams, adding that a
year-end rate between 5.0% and 5.50% was "the right kind of framing".
The about-turn in rates markets in just two weeks has been extraordinary
- with Fed funds futures pricing moving from a terminal rate as low as
4.8% to 5.26% on Wednesday. Year-end pricing has moved above 5% too.
Two-year Treasury yields soared to a 3-month high of 4.64% on Tuesday -
where current Fed rates sit - and only gave back a fraction of that on
Wednesday.
The dollar extended gains against Japan's yen and the pound but was
restrained against the euro by speculation the European Central Bank
faces a similar rethink on inflation and rates that's also pushing up
where its peak tightening might be.
U.S. stocks held up remarkably well on Tuesday - helped by hopes
recession fears are easing even as rate speculation intensifies. But
futures and world stocks in general were feeling the heat today.
U.S. January industrial production and retail sales data are now the
next gauge of what's happening on the ground in the U.S. economy.
Sterling slipped as UK inflation fell faster than expected last month,
even though the annual inflation rate remains in double digits.
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An eagle tops the U.S. Federal Reserve
building's facade in Washington, July 31, 2013. REUTERS/Jonathan
Ernst
Despite many banks benefiting from the higher interest rate
environment, Britain's Barclays has proven an outlier and its shares
dropped almost 10% on Wednesday after a dire 2022 earnings update.
Barclays reported a 14% fall in full-year pre-tax profit as earnings
were pole-axed by surging costs, a collapse in deal fees and
multi-million dollar fines relating to an administrative blunder.
There was better news on the inflation front in energy markets. Oil
dropped for a second day on Wednesday, as an industry report pointed
to ample supplies in the United States and anticipation of further
rate hikes sparked concerns over weaker fuel demand and the economic
outlook.
Warren Buffett's Berkshire Hathaway, meantime, slashed its stake in
Taiwanese contract chipmaker TSMC as well as in some banks in the
fourth quarter, while bolstering its holdings in Apple Inc.
Berkshire cut its position in Taiwan Semiconductor Manufacturing Co
- roughly three months after it said it had bought more than $4.1
billion worth of the stock.
Key developments that may provide direction to U.S. markets later on
Wednesday:
* U.S. Feb NAHB housing index, Empire manufacturing index, Jan
retail sales, industrial production, Dec business inventories, Dec
TIC Treasury holdings data
* European Central Bank President Christine Lagarde speaks in
European Parliament
* U.S. Treasury auctions 20-year bonds* U.S. corp earnings: Cisco,
Analog Devices, Marathon, AIG, Equinix, Kraft Heinz, Biogen,
Albemarle, ROBLOX, Zillow, Roku, Rollins, EQT, Synopsys
(By Mike Dolan, editing by Emelia Sithole-Matarise; mike.dolan@thomsonreuters.com.
Twitter: @reutersMikeD)
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